developing nepals hydroelectric resources - policy alternatives

8/18/2019 Developing Nepals Hydroelectric Resources - Policy Alternatives

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Developing Nepal’s

Hydroelectric Resources:Policy Alternatives

Madeline Bergner


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Acknowledgements

The author would like to thank David Michel and Russell Sticklor (Environmental SecurityProgram, Stimson Center) and Professor Jeanine Braithwaite (Frank Batten School ofLeadership and Public Policy, University of Virginia) for providing invaluable support andguidance throughout the preparation of this report. A special thanks to Kaitlin Brennan forher help, encouragement and careful edits.

Note: The author conducted this analysis as part of a professional education program at the

University of Virginia’s Frank Batten School of Leadership and Public Policy. The conclusions

drawn and opinions expressed in this report reflect those solely of the author and are not

representative of the views of the Batten School, the University of Virginia, or the Stimson

Center.


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Executive Summary 7

Part I: Problem Analysis 8Insufficient Electricity Supply in Nepal 8Costs to Society 11

Part II: Regional Overview and Background 13

Part III: Evaluative Criteria 18

Part IV: Policy Alternatives 21 i. Status Quo 21

ii.

Develop micro-hydropower projects (100 MW) 22

Part V: Evaluation 24 i. Status Quo 24

ii. Develop micro-hydropower projects (100 MW) 39

Part VI: Summary 43 Decision Matrix 44

Part VII: Recommendation and Implementation 45 Implementation 46

Appendix 1. Existing Power Projects in Nepal 47Appendix 2. Projects under construction, planned & proposed 49Appendix 3. Average cost calculations 50Appendix 4. Economic internal rate of return (EIRR) data 52

Endnotes 53

Table of Contents


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Tables

Table 1. Hydropower potential and percent exploited in South Asian countries

Table 2. Consumer tariff rates in South Asia

Table 3. Nepal’s energy forecast to 2028

Table 4. Hydroelectric projects under construction in Nepal

Table 5. Average time requirements of agricultural processing

Table 6. Government of Nepal micro hydro subsidy program (2009)

Table 7. Cost-effectiveness summary table

Figures

Figure 1. Nepal’s energy profile

Figure 2. Map of Nepal

Figure 3. Regional per capita GDP growth (2000-2012)

Figure 4. Major hydroelectric projects & population density by district

Figure 5. Installation cost and cumulative capacity of MHVE/REDP MH units

List of Tables and Fi ures


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ADB Asian Development Bank

AEPC Alternative Energy Promotion CentreAEPB Alternative Energy Promotion Board (to supersede AEPC)

CPN-M Communist Party of Nepal-Maoist

DoED Department of Electricity Development

EIRR Economic Internal Rate of Return

FDI Foreign Direct InvestmentFIRR Financial Internal Rate of Return

GDP Gross Domestic ProductGWh Gigawatt HoursGoN Government of Nepal

HDI Human Development IndexHPL Himal Power Limited

IAP Indoor Air PollutionIFC International Finance CorporationIPP Independent Power Producer

IPPAN Independent Power Producers’ Association, Nepal

KW KilowattsKWh Kilowatt Hours

MH Micro-hydroMHPs Micro-hydro ProjectsMHVE Micro-hydro Village ElectrificationMoEn Ministry of EnergyMoEnv Ministry of EnvironmentMoF Ministry of Finance

MW Megawatts

NEA Nepal Electricity Authority

PDF Power Development FundPDP Power Development ProjectPPA Power Purchase Agreement

List of Acronyms


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REDP Rural Energy Development ProgramRERL Renewable Energy for Rural LivelihoodROR Run-of-river

UNDP United Nations Development Programme

WHO World Health Organization


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Executive Summary

Nepal’s current electricity supply is insufficient, unreliable, and expensive. Despite having83,000 megawatts (MW) of theoretical hydroelectric potential, about 42,000 MW of whichis technically and economically viable, current annual hydropower output barely exceeds700 MW.1 These supply problems impose a number of costs on society, including economicinequity, health and environmental impacts, and economic losses due to unreliableconnectivity and productivity losses.

Approximately 50 percent of the population has access to electricity, and only 5 percent ofthe rural populace has access to electricity from the national grid. Even residents inNepal’s capital city of Kathmandu experience outages several times a day for up to 16 hoursduring the dry season. These electricity shortages have led to a heavy reliance on biomassburning for energy in rural Nepal, which has negative health and environmental impacts,particularly for women and children.

In 2011, peak power demand in Nepal reached 950 MW, and is projected to continueincreasing by around 7.5 percent annually until 2020. This analysis considers severalalternatives to address the 300 MW imbalance between supply and demand for electricitygiven feasibility and cost constraints. The alternatives for increasing hydroelectric capacityinclude:

1. Letting present trends continue;2. Developing micro-hydropower projects (100 MW)

Ultimately, this report recommends pursuing micro-hydroelectric development whiletaking political steps to effectively build up small, medium, and large-scale projects in thelong term. Expanding micro-hydro initiatives such as the Rural Energy DevelopmentProgram (REDP) will address Nepal’s overall economic development as well as rural-urbandisparities in connectivity, health, and economic outcomes. Further, micro-hydro projectsare comparatively feasible given Nepal’s political climate. Large-scale projects are subjectto greater government oversight, and must include a grid expansion or transmissionelement. Micro-hydro power is a smaller scale, community-based alternative with provensuccess in fostering rural development in Nepal.

Despite the short-term recommendation of building up capacity through micro-hydrodevelopment, concrete steps must be taken to facilitate large-scale projects in the long run.The current political and regulatory environment in Nepal is not conducive to small andmedium project development, let alone large-scale dams that would fully take advantage ofNepal’s vast hydroelectric potential.

1 Technically and economically viable potential refers to viability for development given presently availableinfrastructure, such as roads and the electricity grid.


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PART I: Problem Analysis

Insufficient Electricity Supply in Nepal

Nepal’s current electricity supply is unreliable, expensive, and insufficient. These supplyproblems can be attributed to a number of factors, including: “high transmission anddistribution losses, piecemeal expansion of the national grid, high cost of power purchaseagreements, inefficiencies at the Nepal Electricity Authority, and underutilization ofexisting capacity.”i In particular, this report addresses the inadequate development ofNepal’s potential hydroelectric capacity. The insufficient electricity supply imposes anumber of costs on society, including equity costs, health and environmental impacts, andeconomic losses due to unreliable connectivity and productivity losses.

Despite having one of the world’s largest hydropower resources in the world, Nepal lacksreliable and sufficient access to electricity.ii Overall, of the theoretical hydropower

potential of 80,000 MW, about 42,000 MW are technically and economically viable forexploitation.2iii However, the Nepal Electricity Authority (NEA) reports current annualhydropower output of 659 MW. This amount is insufficient to meet domestic energydemand, let alone serve as a potential source of export revenue to bolster Nepal’sstruggling economy. Despite having among the highest commercially feasible hydropowerpotential, Nepal has harnessed about 1 percent, far below the level of every other SouthAsian country (Table 1). Evidently, Nepal has developed only a fraction of its realizablehydropower potential.

Table 1: Hydropower potential and percent exploited in South Asian countries

Country

Hydropower Capacity (MW) % Harnessed of

commerciallyfeasible capacityGross

CommerciallyFeasible

Installed

India 148,700 84,044 39,060 46.48

Pakistan 100,000 59,000 6,555 11.11

Nepal 80,000 43,000 659 1.53

Bhutan 30,000 24,000 1,488 6.20

Sri Lanka - 2,550.7 1,401 54.93

Bangladesh - 755 230 30.46

Total 365,006 213,350 49,394 23.15

Source: CEB (Ceylon Electricity Board) Statistical Digest 2011; CEA (Central Electricity Authority) of India

Annual Report 2010-11; Pakistan Water and Power Development Authority, Hydro Potential in Pakistan,November 2011; NEA Year in Review, Fiscal Year 2010/2011; Annual Report 2011, Bangladesh PowerDevelopment Board; Power Sector of Bhutan, Bhutan Power Corporation Limited; The World Bank, ProjectInformation Document: Kali Gandaki A Hydropower Rehabilitation Project, 2012.

2 Estimates of feasible hydropower potential vary. This report uses the numbers corroborated by both the

World Bank and Asian Development Bank (ADB). The agreed upon figures are 80,000 MW of theoreticalpotential and about 42,000 MW of technically and economically viable potential.


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As Nepal continues to develop and experience population growth, it will require an evengreater supply of electricity. Even now, residents in Nepal’s capital city of Kathmanduexperience power outages several times a day for up to 16 hours during the dry season dueto “load shedding,” or planned power cuts.iv In 2011, Nepal’s peak power demand reached950 MW, far beyond the total installed capacity of 705 MW.v During fiscal year 2010-2011

Nepal’s energy demand rose about 10 percent, and is projected to continue increasing byaround 7.5 percent annually until 2020.vi

Nepal’s electricity tariff is among the highest in South Asia. Table 2, below, displayselectricity tariff rates by country for the domestic, industrial, agricultural, and commercialsectors. Tariff rates, or the price of power generation, differ by country based on “the typeand market price of the sources/fuels used, government subsidies, government andindustry regulation, and even weather patterns.”vii Nepal’s domestic consumer tariff inparticular is the highest in the region. This impacts poor Nepalese who, upon gainingaccess to electricity, are unable to enjoy the full scope of development benefits thatresulting from electrification.

Table 2: Consumer Tariff Rates in South Asia (US cents per KWh)Nepal India Pakistan Bangladesh Sri Lanka

Domesticconsumertariff

0-20 KWh:5.621-250: 10.3>250: 13.9

0-200 KWh:5.5201-400: 8.8>400: 10.4

0-50 KWh: 2.20-100: 5.1101-300: 7.6301-700: 12.4>700: 15.4

0-100 KWh:3.3101-400: 4.2>400: 7.0

0-30 KWh: 2.731-60: 4.361-90: 6.891-120: 19.1121-180: 21.8>180: 32.8

Industrial 9.3 11.3 10.3 5.4 9.1

Agricultural 5.0 3.5 6.2 2.6 13.6

Commercial 10.8 - 15.1 7.1 13.6

Source: Websites of Ministry of Power, India; NepalElectricity Authority, Nepal; Bangladesh PowerDevelopment Board; Ceylon Electricity Board; Sri Lankaand Pakistan Economic Survey, 2010-11.

Energy Profile Nepal’s population has surpassed30 million and the country is already facing asevere energy shortage, particularly in ruralareas. A little over half (56 percent) ofhouseholds in Nepal have access to electricity,including those with off-grid solutions.viii According to the Center for Rural Technology,

P e t r ol e um

7 %

Figure 1: Nepal’s Energy Profile


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approximately 90 percent of Nepal’s electricity comes from hydropower, yet Nepal onlyconsumes 1 percent of electricity. The vast majority of Nepal’s total energy supply comesfrom traditional, non-electric sources of energy such as wood, agricultural waste, and dung(Figure 1). Commercial energy sources such as petroleum and coal provide another eightpercent. The remaining one percent is supplied by hydroelectricity (Source: SARI, 2012).

Therefore, despite the country’s vast hydroelectric potential and the large share ofelectricity met by hydropower, the overall energy portfolio hydropower represents anegligible portion of the overall energy profile of Nepal.

Developing Nepal’s hydroelectric potential can not only satisfy domestic energy demandand create opportunities for domestic growth and development, but also provideadditional revenue by exporting electricity to rapidly developing countries like India.

Nepal’s energy forecast to 2028 indicates the national electricity shortage will only becomemore severe in the future (Table 3). In 2028, Nepal will face an energy output of 17,404GWh and the system peak load is forecasted to reach about 3,679 MW under a medium

growth scenario.ix

Table 3: Nepal’s Energy Forecast to 2028

Fiscal Year Energy (GWh) System Peak Load (MW)2010-11 4,430.70 967.102011-12 4,851.30 1,056.902012-13 5,349.60 1,163.202013-14 5,859.90 1,271.702014-15 6,403.80 1,387.202015-16 6,984.10 1,510.002016-17 7,603.70 1,640.802017-18 8,218.80 1,770.202018-19 8,870.20 1,906.902019-20 9,562.90 2,052.002020-21 10,300.10 2,206.002021-22 11,053.60 2,363.002022-23 11,929.10 2,545.402023-24 12,870.20 2,741.102024-25 13,882.40 2,951.102025-26 14,971.20 3,176.702026-27 16,142.70 3,418.90

2027-28 17,403.60 3,679.10Source: NEA Annual Report, 2011.

Despite these obstacles, the Government of Nepal, independent power producers (IPPs),and foreign investors have successfully completed a range of micro, small, and medium-sized hydroelectric projects. This report will analyze completed projects based on anumber of criteria to determine the best strategy for increasing capacity in the short-term.


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Costs and Concerns Arising from Insufficient Electricity Supply

Equity

Almost 85 percent of the population of Nepal lives in rural areas that lack access to Nepal’snational grid. Between rural and urban populations “[d]isparity in access is stark, with

almost 90 percent of the urban population connected, but less than 30 percent of therural”.x Further, of the 30 percent in rural areas with access to electricity, only 5 percenthave access to electricity from the grid.xi

Environment and Health Impacts

As a result of poor connectivity, rural Nepalese rely on firewood and other traditional fuelsfor cooking and heating. Relying on biomass as a primary source of energy has impactedNepal’s forests and led to increased carbon dioxide emissions. Deforestation has become agrowing problem in rural Nepal, and “only 29 percent of the country remains forested,compared to 37 percent in 1990.”xii

In addition to the environmental impacts associated with a dependence on biomass forfuel, there are adverse health outcomes that disproportionately affect rural Nepalese. Inrural Nepal, fuel wood supplies about 86 percent of the total energy requirement, and issupplemented by animal dung, agricultural residues, and petroleum products.xiii Accordingto a UN World Health Organization (WHO) report, an estimated 7,500 people in Nepal dieannually as a result of indoor air pollution (IAP) from solid fuel use.xiv These air qualityissues in turn have a disproportionately negative impact on women and children in ruralNepal, who are subject to greater exposure.

Economic Impacts

In a 2012 overview of Nepal’s present investment climate, Afram and Del Pero found “over

99 percent of the firms suffered power outages and on average firms suffered 57.3 outagesper month each lasting 4.9 hours”. These outages are costly to the private sector, resultingin losses of 22.1 percent of annual sales.

Further, Nepal lacks fossil fuel reserves of its own, but fossil fuel imports from India makeup 7 percent of total annual energy supplies. In 2005-2006, the total cost of importingpetroleum products was USD$35 million.xv There has been a steady increase in thequantity of petroleum purchased annually, and this increasing dependency “coupled withrising fuel price[s] in the international market is severely impacting the already fragileeconomy of the country.”xvi Although around 50 percent of petroleum imports are used fortransportation, and would therefore not be offset by developing hydropower resources, theother 50 percent that goes to residential, commercial and public services would be offsetby substituting hydropower for petroleum.xvii Therefore, the long-term implications ofcontinued fossil fuel dependence serve as further rationale to increase hydroelectriccapacity.


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Implications for development

Almost seven years after the end of a 10-year internal conflict, Nepal remains one of thepoorest countries worldwide, ranking 157th out of the 187 countries on the HumanDevelopment Index. Harnessing hydroelectric potential along the Himalayas will not only

provide Nepal with a more reliable source of electricity, it would also address the costscurrently borne by the population. Rural electrification could mitigate national inequitiesby bringing health and economic well-being to millions of Nepalese.

In addition to domestic benefits of hydroelectric development, surplus energy harnessedfrom hydroelectric projects can be sold to generate export revenue. According to the U.S.Energy Information Administration (EIA), between 2008 and 2035, China and India’s shareof world energy consumption will jump from 21 percent to 31 percent.xviii Both countrieshave expressed interest in developing hydropower projects in Nepal to address thisprojected growth in demand.

Development of hydroelectric potential in Nepal is not a question of if, but rather when,and by whom. The potential for poorly planned or executed hydroelectric projects runs asignificant risk and necessitates a strategy for development that will cause minimalenvironmental damage in Nepal. This analysis will attempt to identify the developmentstrategy that addresses the supply and demand disparity for electricity in the short termwhile incurring minimal economic, political, and environmental costs.


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PART II: Regional Overview and Background

This section provides a brief economic, political and regulatory overview of the presentconditions in Nepal. Additionally, it includes a description of Nepal’s current hydroelectricprofile.

Figure 2: Map of Nepal

Source: CIA World Factbook, 2013

Economic OverviewNepal is one of the poorest and least developed countries in the world. About one-quarterof Nepal’s population lives below the poverty line, obtained by aggregating food and non-food expenditures.xix In 2011, average per capita income was only $427, with 55 percent ofthe population living on $1.25 or less per day.xx In 2012, per capita gross domestic product(GDP) in Nepal was only $1,300. Compared with other South Asian economies, Nepal’sperformance is notably weak. In 2012 Nepal’s per capita GDP remained the lowest in theregion (Figure 3). Even Burma, a country whose own internal conflict ended in 2011, has

surpassed Nepal in per capita GDP.


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Figure 3: Regional Per Capita GDP Growth (2000-2012)

Source: Calculated from CIA World Factbook, 2013; World Bank World Development Indicators,2013

According to the United Nations Development Programme (UNDP), in 2012 Nepal’s HumanDevelopment Index (HDI) was 0.463 compared to an average of 0.558 for South Asiaoverall. Based on the HDI, which encompasses health, education and living standards,Nepal is ranked 157 out of 187 countries worldwide.

Agriculture currently employs around 74 percent of Nepal’s workforce and accounts for 36percent of GDP.xxi Potential hydropower projects should take this into account, ashydroelectric development can alter river flows in a way that may negatively impactfarmers or villages downstream.

Political and Regulatory EnvironmentOne current barrier to hydropower development projects in Nepal is political instability. InFebruary 1996, the Communist Party of Nepal-Maoist (CPN-M) led an uprising against theconstitutional monarchy. The Maoists sought to install a one-party communistgovernment, but the insurgency gave way to ten years of political struggle. In April 2006,the king of Nepal transferred power to a coalition called the Seven Party Alliance. TheSeven Party Alliance and the Maoists established a peace agreement in November of thesame year, ending the ten-year insurgency and establishing a new coalition government.

Under this agreement, a Constituent Assembly was to be formed through elections in 2007,although these elections did not actually take place until April 2008.xxii The peaceagreement marked a significant step in Nepal’s political transformation, and ended thedecade-long struggle against the monarchy. However, Nepal’s Maoist insurgency left over12,000 people dead and 100,000 people displaced, and political issues continue to plaguethe country.xxiii

0

1000

2000

3000

4000

5000

6000

7000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

G D P

P e r C a p i t a

Year

NepalPakistan

Bangladesh

India

Sri Lanka

Bhutan

Myanmar


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Despite tremendous political progress since the Comprehensive Peace accord between theNepalese government and the Maoist insurgency was signed in 2006, Nepal’s governmentremains in a volatile state. According to the World Bank, as of May 2013 Nepal has had 20governments since the country became a democratic republic in 1990. Furthermore, in justthree years from 2008 to 2011, Nepal had four separate coalition governments.xxiv Nepal is

currently following the 2007 Interim Constitution despite ongoing constitutional reformefforts.

In May 2012, Nepal’s Constituent Assembly ended its four-year term without even draftinga new constitution. Between May 2012 and March 2013, Nepal’s government remainedwithout a parliament. However, in mid-March 2013, the appointment of Nepal’s chiefjustice as head of an interim government was announced. This appointment “increases thechances of an early election in June to choose an assembly to complete the drafting ofNepal’s first constitution after the abolition of the 239-year-old monarchy in 2008.”xxv While this step marks great progress from a yearlong stalemate, lingering uncertaintyremains surrounding Nepal’s election prospects and the drafting of a new constitution.

According to World Bank Governance Indicators, Nepal ranks below the 50th percentile inevery category, including: voice and accountability, political stability and the absence ofviolence; government effectiveness; regulatory quality; rule of law; and control ofcorruption. Nepal ranks particularly low in political stability, falling in the 6th percentile ona 0-100 scale.

Political instability makes Nepal less attractive to foreign investors, “has stalled domesticreform efforts, and dissuaded foreign investors from pursuing energy projects in Nepal”.xxvi Countries such as China and India are interested in developing energy projects to takeadvantage of Nepal’s natural resources, but often not willing to risk lost investments due to

political turmoil. Overall, political instability serves as a barrier to lasting andtransformative growth and development in Nepal.

There is no “one window” agency managing hydropower development, which hasdissuaded potential investors from pursuing projects in Nepal. According to the U.S.Department of State’s 2012 Investment Climate Statement on Nepal, despite recentGovernment of Nepal (GoN) initiatives to open the hydropower generation sector toprivate development, a wide variance between laws and implementation persists. In fact,although the Government announced a new policy in August 2011 to attempt to increasethe number of licenses awarded for projects above 10 MW, the process remainscumbersome and “[u]nreasonable delay in the evaluation of hydropower survey

licenses…discourage long-term investment in this sector”.xxvii Although Nepalese lawrequires licensing decisions to be made within 30 days of application, the governmentrarely makes this deadline. Nepal ranks 107th out of 183 countries according to the WorldBank’s ease of doing business standards. These conditions have all stalled privateinvestment in Nepal and prevented any measurable progress in developing the country’svast hydroelectric potential.


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Although the GoN awards hundreds of licenses annually for hydropower projectdevelopment, few projects move forward. The Department of Electricity Development(DoED), overseeing the issuing of licenses for hydropower projects, has issued around13,289 MW of survey licenses to date, with only a small fraction of these moving forward toconstruction.xxviii Additionally, the GoN recently increased the minimum survey license fee

by 100 percent, from around US$575 to US$1,150.xxix

Further, since March 2013, the DoEDhas cancelled survey licenses for some 40 projects with a combined capacity of more than1,400 MW.xxx These recent indicators provide even less incentive for foreign investors topursue projects in Nepal.

To meet growing national power demands, the Government of Nepal has set a adevelopment goal of harnessing 10,000 MW of hydroelectric potential by 2020.xxxi Thetargeted development plan was revised to reach 2,035 MW of hydropower capacity forboth domestic use and export by 2017, and 4,000 MW by 2027.xxxii However, the GoN’sprevious target figure was to increase generation capacity to 824 MW with 70 MW ofexports by 2007, and as of 2013 the generation capacity still had not met these goals.xxxiii

Although the government recognizes the enormous potential for hydropower developmentand sets lofty targets to increase capacity, these targets have proven unattainable givenpolitical and social constraints.

Hydropower OverviewBased on size and production capacity, there are several major types of hydropowerprojects.3 Micro-hydro projects are those with an overall capacity of less than 100 kW;small-scale hydroelectric dams harness between 1 and 10 MW; medium-scale projects arethose between 10 and 100 MW installed capacity; and large-scale hydropower projects arethose with 100 MW capacity or greater.

In addition to different-sized projects, the schemes implemented in Nepal fall under twobroad categories: storage projects, or run-of-river (ROR) dams. A storage project storeswater for release during the wet season, or times of low electricity demand, and releases itfor quick generation during peak hours or the dry season.xxxiv Contrastingly, ROR projectscannot regulate river flow, and rather generate electricity proportional to the river’s flow.Therefore, the ROR structure does not alter the natural environment as much as a storageproject, but also provides a less reliable supply of power. Nepal’s hilly landscape is wellsuited to ROR projects, as natural drops in elevation provide great hydropower potentialwithout constructing a reservoir. In terms of cost, storage projects are typically morecostly than ROR projects of a similar size due in part to a need to construct a large reservoirdam for storage.xxxv

Climate Change ImpactsHydroelectric projects designs are based on river flow; therefore changes in runoff canhave significant impacts on the viability of certain projects. Based on a GoN Water andEnergy Commission Secretariat report, although hydropower plants are designed based on

3 Classification for hydropower projects varies by source. This report uses the Government of Nepal’sstandards as its source for classifying different hydroelectric projects.


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65 percent dependable river flow, under severe conditions of climate change, averagerunoff may be reduced by as much as 14 percent.xxxvi Further, climate scientists predictincreasingly intense monsoon seasons, decreased rain and snow in the winter, andcontinued glacial retreat, all of which diminish the reliability of water resources inNepal.xxxvii

Another concern associated with climate change is the dependability of river flow duringthe dry season. In this case, the variability of river flow increases, making hydropowerplanning more complex and difficult. Chaulagain notes initial increased glacier melt due towarmer temperatures will give way to reduced glacial reserves, decreasing hydropowerpotential over the long run.xxxviii This study learned, based on present rates of retreat forHimalayan glaciers, “there will be a 6 percent decrease in hydropower potential at the endof this century even without any further warming”.xxxix Another factor associated withclimate change are glacial lake outburst floods (GLOF). Atmospheric warming and glacialretreat in the Himalayas has created new meltwater lakes, several of which have burstnaturally occurring dams in Nepal, resulting in extremely destructive flood surges.xl

Although GLOFs are not a recent phenomenon, the frequency and rate at which lakes growlarge enough to flood has changed and will likely continue to accelerate with climatechange.

Operation and maintenance problems arising from sediment wear on hydro machinery hasalready become a problem in Nepal. Flooding due to altered weather patterns can impactsediment load, which increases the costs of operation and maintenance and decreasesturbine efficiency.xli

To address climate change concerns, in 2009 the GoN instituted a subsidy policy forrenewable rural energy. This subsidy covers micro-hydro, biogas, solar energy, water

mills, wind energy, and improved cooking stoves to promote renewable energytechnologies in poor and rural households.xlii


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PART III: Evaluative Criteria

This section evaluates options for harnessing hydroelectric potential in Nepal along thefollowing criteria:

Cost-effectiveness; Feasibility; Equity; and

Environmental & health impacts

Cost-EffectivenessIn this section, cost considerations include a calculation of cost-effectiveness and adiscussion of other costs and benefits associated with a given alternative.

This section evaluates the cost-effectiveness of a given alternative based on the cost (US$)

per kilowatt (kW) added to Nepal’s installed electricity capacity. This analysis relies ondata from past hydropower projects in Nepal completed by the World Bank, AsianDevelopment Bank (ADB), United Nations Development Programme (UNDP), Governmentof Nepal (GoN), Nepal Electricity Authority (NEA), and private investors such as Nepal’sIndependent Power Producers (IPPs).

According to the NEA, in 2011 Nepal’s peak power demand reached almost 970 MW,compared to a total installed capacity of only 659 MW. Therefore, cost-effectiveness ismeasured as the cost to add 300 MW to Nepal’s total installed capacity. This additionwould balance the supply and demand of Nepal’s present energy situation. The mostdesirable option will be that which requires the lowest cost to achieve the desired increase

of 300 MW in Nepal’s installed capacity. The average cost for each option is measured bytaking a weighted average cost of the available project data for previously constructeddams in Nepal. A list of the projects with cost per kW data can be found in Appendix 3,along with weighted cost calculations.

To determine the total cost to increase capacity by 300 MW, this analysis uses the followingcalculation: Weighted average cost * 300,000=Average cost to achieve desired capacityunder a given alternative.4

Another cost measure includes the estimated economic internal rate of return (EIRR) basedon World Bank and ADB project appraisals. The EIRR is the interest rate at which the costs

and benefits of a project are equal, discounted over the lifespan of a project. According tothe World Bank EIRR definition, in developing countries projects with an EIRR above 12percent are typically the most viable.xliii Therefore, those projects with EIRRs above 12percent are considered more favorable in this analysis.

4 300 MW=1,000 kW; 300*1,000=300,000. Therefore, 300,000 is the amount to multiply by to increasecapacity by 300 MW.


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A discussion of further costs and benefits of each alternative will include: operation andmaintenance costs and potential export revenue generated.

FeasibilityThis section considers political, social, and financial factors in determining the overall

feasibility of each option.

Political Feasibility

Political feasibility refers to the likelihood of a policy option being adopted given thepolitical landscape in Nepal. A tumultuous political environment in Nepal presents anobstacle to developing hydroelectric projects. Therefore, project types successfullycompleted in the past will be considered more politically feasible than those with no pastprecedent. Projects with less government oversight or fewer steps to license procurementare considered more politically feasible.

Social Acceptability

One obstacle to hydropower project implementation in the past has been communityobjection and dam-related protest. The rationale behind developing micro-hydro schemeswith active community involvement is to facilitate project completion while increasingcapacity and other development benefits. Proposals for large-scale hydropower projectshave often evoked public protest in Nepal, particularly in communities where projects willbe located. Therefore, community perceptions of different hydroelectric options areimportant to consider when evaluating the feasibility of different policies. Proposalsinvolving India-Nepal collaboration for dam building have been met with particularlystrong protest.

Financial Implementation

Despite tight domestic capital markets, there are multiple funding sources available forhydropower development in Nepal. However, different sized projects will attract differentfunders, with development banks, government expenditures and foreign aid as the mostlikely funding sources for micro-hydro and foreign direct investment a more likely optionfor large-scale dams. As such, the accessibility of funding sources for each option areconsidered as another measure of feasibility. External aid is critical for developing Nepal’shydroelectric potential, as domestic commercial banks have a combined lending capacity ofaround US$115-140 million, the cost to install only up to 150 MW of capacity.xliv Some ofthe major donor agencies that have operated in Nepal include: the Norwegian Agency forDevelopment Cooperation (NORAD); the United States Agency of InternationalDevelopment (USAID); the United Nations Development Programme (UNDP); the WorldBank; the Asian Development Bank (ADB); and German Aid Agency (GTZ).

Equity Disparate grid access and off-grid electrification between rural and urban populations isanother problem associated with insufficient electricity in Nepal. Depending on projectsize and location, certain hydropower projects will favor different populations. For


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example, large-scale hydroelectric projects aimed at export revenue and grid-basedelectricity supply will not benefit rural populations unless they incorporate a gridextension into the project area as well. On the other hand, micro-hydro projects do notproduce enough electricity to contribute any sizeable amount for export or national use,and therefore have a disproportionately favorable impact on rural populations.

Due to the different benefits associated with different types of hydropower projects, thisassessment will consider horizontal and vertical equity. Horizontal equity refers to equaltreatment for an entire population, whereas vertical equity considers whether analternative will benefit the most vulnerable members of society. In the context of thisstudy, where Nepal’s rural population is disproportionately affected by limited electricitysupply, it will be important to consider both types of equity.

Environmental & Health Impacts

As discussed in the problem analysis, Nepal’s reliance on biomass and other traditional

fuels has led to negative environmental and health outcomes. In particular, deforestation,carbon emissions, and indoor air pollution are key environmental and health problemsresulting from Nepal’s current energy supply structure.

Policy options exerting less negative impacts on the environment are rated as morefavorable. Those with positive health impacts are assessed as beneficial for healthoutcomes.


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PART IV: Policy Alternatives

This section presents four options for development strategies in Nepal’s hydropowersector: letting present trends continue; focusing on micro-hydro projects to stimulate ruralgrowth and development; developing small-and-medium-scale hydroelectric projects; and

exclusively pursuing large-scale dam building. This section briefly introduces the fouralternatives, which will be evaluated in depth in Part V.

Alternative I: Let present trends continue

One policy alternative is allowing present trends to continue. There are currently no well-established practices or principles for hydropower development in Nepal. Although theGoN has set ambitious development goals for harnessing Nepal’s vast hydroelectricpotential, the variance between laws and implementation dissuades investors and causescostly delays for current projects.

Funding for hydroelectric projects comes from a variety of sources, including the GoN, theAsian Development Bank (ADB), the World Bank, and limited foreign direct investment(FDI) from other countries such as Norway, India, and Japan. The GoN, ADB and WorldBank have provided funding for many of Nepal’s projects, and will likely continue to funddevelopment until the political and regulatory climate changes to facilitate FDI.

Appendix 1 lists the existing power projects in Nepal. Appendix 2 lists those that are underconstruction, planned, or proposed.

Alternative II: Develop micro-hydro projects (MHPs) to power rural growth and domesticeconomic development

According to the Nepal Electricity Authority (NEA), a hydroelectric plant is classified as“micro” if it has an installed capacity between 10 and 100 kW. Nepal is geographically wellsuited for run-of-the-river (ROR) hydroelectric development, which “uses the natural flowand elevation drop of the river to generate power”.xlv Conventional storage projectsinclude dam construction, which creates a lake behind it. This model is beneficial becausethe storage component ensures there will be water available for generations even duringtimes of drought. Despite this, ROR projects exert little impact on the environment and thelocal population. Further, due to Nepal’s great natural hydroelectric potential and naturaldrops in elevation, the terrain is well suited for ROR projects.

Micro hydro projects generate small amounts of energy, but are ideal for local communitieslavking access to a national electricity grid. Instead of connecting to the national grid,MHPs typically supply power through local mini grids. As Nepal currently lacks acomprehensive or functional national energy grid, a number of communities have alreadydeveloped micro hydro projects to gain access to electricity for lighting, refrigeration,cooking, and communications technologies.xlvi Existing MHPs provide electricity to Nepal’sfar-reaching rural communities that might otherwise take years to gain connectivity to the


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national grid. The average lifetime for a micro-hydropower project is around “15 yearsbefore major refurbishments are needed”.xlvii

Since the 1970s, an estimated 2,500 MHPs have been completed in 40 districts in ruralNepal, generating a total of around 17,000 kW of electricity.xlviii Development banks such as

the World Bank and ADB have endorsed micro projects for their transformative effects onrural communities. These community benefits include home lighting, electricity for smallenterprises, higher local incomes, increased educational opportunities, and fewer adversehealth impacts from kerosene lanterns.xlix The benefits and costs of developing thesesystems are detailed in the evaluation section of this report.

Recently, mini-grid technology has begun to appear as a potential solution to efficiencyconcerns about micro-hydropower projects. Mini-grids connect two or more micro-hydrounits, and can improve the quality and reliability of isolated MH units. Further, thistechnology will give communities the option of selling surplus electricity to the nationalgrid, if and when the grid is extended to those rural areas.l The first micro-hydro mini-grid

was completed in Baglung, western Nepal in 2011 by the Alternative Energy PromotionCentre (AEPC). This grid connects six MHPs over 8 kilometers and now serves 1,180households. Mini-grid connectivity has ensured that locals enjoy 24-hour access toelectricity and has reduced the monthly cost of electricity from US$1 to US$0.80.

Alternative III: Pursue mid-range (1-100 MW) hydropower development

In Nepal, small-scale projects are between 1 and 10 MW, and medium-scale hydropowerprojects are those between 1 and 100 MW installed capacity. Small and medium projectswill be evaluated as one alternative due to their relatively similar features.

A number of mid-scale projects already exist in Nepal, the majority of which require gridconnectivity. Although there is past precedent for these projects, the regulatory processcan be lengthy due to site feasibility studies and other hurdles.

Typical funders for mid-range hydropower projects include: GoN; development banks suchas the World Bank and ADB; and independent power producers (IPPs). Appendix 1contains a list of the major medium-and-small-scale hydropower projects in Nepal.

Alternative IV: Focus development efforts on large-scale hydroelectric projects (>100 MW)

For the purpose of this study, dams classified as “large-scale” in Nepal are those with a

capacity of 100 MW or more. There is only one complete large-scale project in Nepal todate, the Kali Gandaki A. Construction on the 144 MW Kali Gandaki A began in 1997 andwas completed in 2002. Since 2002, it has operated as a run-of-the-river (ROR) plantproducing around 592 gigawatt-hours (GWh) per year (ADB, 2012).

Although most complete hydroelectric projects in Nepal are ROR, several of the proposedor planned large-scale dams involve a storage component. The GoN has indicated that


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Nepal should add capacity from a large storage project to increase the reliability of theelectricity supply, as ROR projects produce energy subject to variable river flows.

All large-scale projects require a significant investment in infrastructure, includingtransmission lines, grid expansion, and road construction. These high costs make large-

scale projects impossible to complete in Nepal without funding aid. Despite highup-frontcosts and a longer period on returns due to lengthy construction time, foreign funders suchas China, India, and Japan have expressed interest in developing projects in Nepal.Additional funding is available from international development banks such as the WorldBank and ADB.


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PART V: Evaluation

Evaluation of Alternative I: Let present trends continue

Cost-EffectivenessAs mentioned in the discussion of criteria, cost-effectiveness is measured as the cost toincrease Nepal’s total installed capacity by 300 MW. Presently, Nepal has a number ofhydropower projects under construction (Table 4).

Table 4: Hydroelectric projects under construction in Nepal

NameCapacity

(MW)Type Projected Commissioning date

Projects under NEA

Chamelia 30 ROR August 2013

Trishuli-3A 60 ROR May 2014

Kulekhani-III 14 STO September 2014Rahughat 30 ROR 2016

Under NEA Subsidiary Companies

Upper Tamakoshi 456 ROR 2 units March 2015, 4 units March 2016

Sanjen 14.3 ROR December 2015

Upper Sanjen 42 ROR July 2015

Rasuwagadhi 102 ROR 2016

Bhotekoshi 111 ROR December 2016

Trishuli-3B 37 ROR --

Bheri-Babai Diversion 48 ROR 2018

Budhi Ganga 20 ROR --Approximately 300,000 kW of projects with different capacities are under construction byIPPs

Note: ROR refers to run-of-river dams, STO to a storage project.Source: International Water Power & Dam Construction, 2013.

Under this scenario, Nepal will add around 850 MW based on hydroelectric projectscurrently under construction. The earliest commissioning date for any of these projects,barring delays, is August 2013. However, Nepal’s fractured internal politics threatens thenational energy outlook and prevents any measurable success in increasing hydroelectriccapacity. For example, the Chamelia, scheduled for commissioning in August 2013, was

initially scheduled for completion in 2011. In April 2013, the project chief admittedcompletion was unlikely even by late 2013.li Nepal’s unstable political and regulatoryclimate will likely prevent these projects from being completed in time to address Nepal’spresent energy shortage, let alone meet growing demand projections.

According to the World Bank, resettlement costs in Bank projects exceed initial estimatesby an average of 54 percent.lii In the case of the 70 MW Middle Marsyangdi Hydro Electric


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Project (MMHEP), a separate office under the Environmental Division of the NEA wasestablished to address resettlement concerns. Although dam construction in Nepal doesnot necessarily involve resettlement, these costs are often underestimated in the planningstage. This impacts the project cost-effectiveness, particularly for those dams that areconstructed in more densely populated areas.

Nepal’s current electricity situation does not harness enough capacity to satisfy domesticdemand and prevents hydropower from being used as a source of export revenue. Nepal’spresent strategy for hydroelectric development is not optimal for any measure of cost-effectiveness.

Feasibility

Overall, increasing Nepal’s hydroelectric capacity through the status quo faces severefeasibility challenges. The aforementioned projections for increasing capacity by 850 MWby late 2013 do not account for delays that may occur as a result of construction problems

or local unrest. As noted in the political overview, although the GoN has set targets in thepast for increasing hydro capacity, they have consistently failed to meet these targets.According to Dr. Sandip Shah, president of the Independent Power Producers Association(IPPAN), the GoN’s goal of increasing capacity by 10,000 MW by 2020 is unfeasible.liii Therefore, Nepal’s total installed capacity is unlikely to change dramatically for the nextseveral years.


Letting present trends continue is politically feasible, because it requires no change.However, this method fails to address the problem of insufficient electricity supply.

Further, the political and regulatory climate both serve as obstacles to hydroelectricdevelopment in the present scenario.

Hydropower development in Nepal is unlikely to occur without government reform.Government spending on hydropower development has remained low and the proportionof hydropower development expenditure to GDP, in the last two decades, has notsurpassed 1.1 percent.liv

Community Attitudes

Local attitudes toward hydropower development in Nepal vary depending on the size and

impacts associated with different projects. Nepal’s radical Maoist faction is staunchlyagainst large-scale projects designed to export electricity to India or China. However, low-impact projects such as micro-hydropower units are typically well received by thecommunities in which they are built.

In addition to the Maoist party’s opposition to foreign funded hydropower projects, therehave been several protests regarding planned hydroelectric development. Most recently, acontroversial government decision to upgrade the Upper Trishuli 3A project using Chinese


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contractors sparked protests from several employee unions as well as former Nepalileaders. On June 12, 2013, just two weeks after the proposal was submitted, the NepalElectricity Authority revoked the upgrade due to strong opposition.lv Several groups,including the National Youth Volunteers, the youth wing of the Maoist faction, have alsoopposed foreign development from India, calling it “’Indian intervention’ in Nepali hydro

resources”.lvi

Figure 4 displays Nepal’s population density by district as well as existing, underconstruction, and proposed major dam sites. This map provides a visual indication ofdistricts where large-scale projects may meet opposition due to greater population density.There are no proposed dams in the districts with the greatest population density, but anumber of proposed and planned sites are located in areas with moderate populationdensity.

Figure 4: Major Hydroelectric Projects & Population Density by District in Nepal

Data provided by: World Bank, 2013; Statoids, 2013.Source: Author Depiction using GIS software.

Financial Feasibility

The current regulatory environment for developing hydropower projects in Nepal is bothtime consuming and confusing. As described in the political and regulatory overview, thecomplexity and uncertainty of Nepal’s current regulatory environment dissuades investorsfrom pursuing hydropower projects. Despite GoN initiatives to facilitate investment both


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generally and in the hydropower sector specifically, there is no standardized process forissuing permits and implementing projects.

Equity

At present, only 56 percent of households in Nepal have access to on- or off-grid electricity.,There is a large connection disparity between urban and rural areas. Around 90 percent ofurban households are connected to an electrical grid, compared to less than 30 percent ofrural households.lvii Considering that the rural population accounts for around 84 percentof Nepal’s total population, this lack of connectivity has huge implications for nationaldevelopment. Further, social and economic development in electrified households vastlyoutpaces that of non-electrified households.lviii The Government is unlikely to extend thenational grid to rural Nepalese households in the immediate future due to financial andtechnical constraints. It is very likely that this inequity between urban and ruralconnectivity will persist under the current scenario in Nepal, with vertical equity remainingan obstacle to national development.


In the status quo scenario, rural Nepalese still rely on biomass and traditional fuels tosupply their electricity and heat. Thus, if present energy trends are not addressed, Nepal’sdeforestation problem will continue. Further, the problem of indoor air pollution wouldalso persist. Although the development of the abovementioned 850 MW would easenegative environmental and health factors associated with burning biomass for electricity,it is unclear how much of this potential hydropower would benefit rural versus urbanNepalese.

Evaluation Summary of Alternative I: Let present trends continue

Benefits Politically feasible in that it requires no change

Challenges Unclear how long it will take Nepal to balance electricity supply and demand Low government spending on hydropower development Local opposition to currently proposed large-scale dams Very few licenses moving to implementation; licensing process is lengthy and

confusing

Rated poorly for ease of doing business, thus discouraging potential investors Only 56 percent of the population has any access to electricity Rural-urban connection disparity is vast, with 90 percent of urban Nepalese connected

compared to less than 30 percent of rural Nepalese Unclear environmental standards for project development Reliance on burning biomass and other traditional fuels, perpetuating deforestation

and indoor air pollution particularly in rural Nepal


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Overall, this option does not significantly alter present development patterns, andtherefore does not solve the problem of insufficient electricity supply in Nepal. Lettingpresent trends continue is not an optimal choice for short- or long-term economic anddevelopment goals.

Evaluation of Alternative II: Micro-hydro development

Cost-Effectiveness

The outcomes of interest for this criterion are the number of kilowatts produced and thecost to produce them. Building up total installed capacity by pursuing micro hydropowerprojects would be a very cost-effective alternative because the average cost per kilowattgenerated is low compared to larger hydropower plants.

Since the 1970s, an estimated 2,500 micro hydro projects (MHPs) have been completed in

40 districts in rural Nepal, generating a total of around 17,000 kW of electricity.lix Cost andcapacity data are not available for all projects, and such a comprehensive cost analysis isbeyond the scope of this report. Therefore, average cost data from the Rural ElectrificationDevelopment Programme (REDP) serves as an approximation for average cost to buildfuture MHPs in Nepal.

The REDP is a joint venture between the United Nations Development Programme (UNDP)and the Government of Nepal (GoN). The REDP alone has installed 317 micro-hydro plantsin Nepal. The cost range for installing these units is between $1,279 and $1,779 per kW ofoutput.lx Therefore, the total cost to increase Nepal’s overall installed capacity by 300 MWto reach the quantity demanded in 2012 (950 MW) would be between $384 and $534

million.5

Initial investment costs for micro-hydro plants are generally competitive compared toinstalling small and medium scale hydropower, which costs around US$2,000 per kW ormore.lxi Further, national grid expansion to Nepal’s hilly and widespread rural communitiesis technically and financially unfeasible. As mentioned in the alternative description,developing mini-grid technology may increase the reliability of individual MH units, andminimize the cost of electricity for locals. This technology is still being tested in a few pilotcommunities, but initial cost and efficiency returns indicate that it may be a viable optionfor large-scale implementation in rural Nepal.

In 2003, the World Bank and the GoN implemented the Power Development Project (PDP),which included three components: a Power Development Fund (PDF), a Micro-hydroVillage Electrification (MHVE) Program, and transmission improvements for the nationalgrid. Under the PDF, a range of small and medium-scale projects were completed. In theproject analysis, the World Bank determined the economic internal rate of return (EIRR)

5 See Appendix 3 for calculations.


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for the micro-hydro initiative as well as the small and medium projects. The EIRRs for theMHVE reached approximately 10 percent. These systems exhibit a relatively poor EIRRdue to the “numerical scale of the program (125 to 150 systems), and the community-basedapproach”.lxii The report notes there are a number of economic benefits not quantified thatwould alter this analysis, including benefits from increased energy consumption due to

lower prices, community education benefits, the ability to generate income during theevening, reduced incidence of indoor air pollution, and reduced carbon emissions fromtransitioning away from diesel and kerosene usage.lxiii The economic internal rate of returnwas higher for larger MH units in the project, those around 35 kW, compared to smallerschemes of around 15 kW. The larger MHP exhibited returns of around 12.2 percent,compared to an 8.3 percent EIRR for the small project.

Discussion of further costs and benefits

In addition to the average cost per kW of electricity produced, this evaluation considered anumber of other costs and benefits associated with installing MHPs in rural Nepal. It takes

about 21 months to complete a micro-hydro plant in Nepal, “including a feasibility study,review, government approval, construction and installation”.lxiv Given the percentage ofthe population that still lacks access to electricity, or reliable electricity, this time frame isadvantageous compared to larger-scale projects that can take years or even decades tofinish.

Some of the REDP development benefits include increases in annual household incomesfrom access to electricity by an average of US$121, a difference of 8 percent. Additionally,districts saw around 40 new businesses created along with the installation of a micro-hydropower unit.

Hydropower installation also benefits agricultural productivity in rural Nepal. Micro-hydrounits can be used for agricultural processing, which leads to time savings of 30 to 110hours depending on the processing activity. Table 5 depicts the different timerequirements for processing with and without hydropower.

Table 5: Average time requirements of agricultural processing

Activity Traditional (hours) Hydropowered (hours)

Milling 32.3 1.2

Hulling 32.5 1.1

Expelling 117.5 4.5

Note: Milling refers to the agricultural process of grinding grain in a hand mill. Hulling uses atraditional Nepalese rice beater called a dhiki to remove the outer husks of grains of rice. Expellingrefers to the process of oil expelling from mustard seed, using a tool called a khol.

Source: Sovacool, 2011.

Time savings and improvements in productivity resulting from electrification greatlybenefit under-developed rural communities in Nepal. Another agricultural benefit from


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electrification is refrigeration, which enables farmers in rural Nepal to keep milk and otherproducts in cold storage. One farmer noted that he now owned two cows and was able tosell 4 to 5 liters of milk a day, whereas before he only owned one and “could barely sell aliter of milk a day”.lxv

There are several costly technical challenges to implementing micro-hydropower projects.The turbines used for MHPs “have natural limits to their efficiency, operating at only 60 to70 percent the efficiency of other designs”.lxvi Additionally, although most micro-hydrounits produce electricity 24 hours a day, Nepalese communities, on average, use electricityfor less than six hours a day.lxvii Despite these inefficiencies, the average cost of installing aMH unit is competitive with other size hydroelectric plants.

Feasibility


The precedent for development of MHPs has been set through programs such as the REDPmentioned above. In 2011, after completing the third phase of the REDP, the GoN, UNDP,and The World Bank launched the Renewable Energy for Rural Livelihood (RERL) program.RERL aims to further increase rural access to electricity by scaling up the REDP to anadditional 28,500 households, totaling around 3.15 MW of hydropower. In the first threemonths of its implementation, RERL expanded electrification from MHPs to an additional984 households.lxviii

Although political precedent exists for pursuing micro-hydro electrification in rural Nepal,there are several political challenges associated with this option. Sovacool et. al. (2011)conducted research interviews with key stakeholders in Nepal, including government

officials, members of civil society, businesses, and local communities. A majority ofrespondents highlighted institutional capacity and aid dependency as the two greatestpolitical barriers to implementation of MHPs in rural Nepal. Regarding institutionalcapacity, one respondent noted, “the AEPC is understaffed and donor dependent, progressis not as fast as it could be”. Primary concerns with aid dependence included, “donordysfunction,” where “sponsors give money too quickly, but with no sense of responsibility,funding microhydro plants that work for a few years and are then quickly forgotten about”.

Community Attitudes

This option ranks very high in terms of community attitudes. In the previously mentioned

PDP, unlike the small and medium projects, MHPs “were not prone to be targeted byinsurgents during the protracted Maoist civil war, in part due to the extensive involvementof grassroots village communities in t hese projects”.lxix The community interest inmaintaining micro-hydro units further strengthens this option. Indeed, the World Bank“expected 5-10 percent of all microhydro units under the MHVE to ‘fail,’ due in part to thelack of maintenance but also the uncertain political environment,” but instead “99 percentof all plants are still working technically,” with failure rates between one and five percent.lxx Since the primary benefits of installing micro-hydropower systems are accrued by the


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community residents themselves, this option is seen as most favorable for and acceptableto rural communities.

Some social challenges associated with micro-hydropower systems include communitydisagreement over whether or not to pursue a MH project, equity concerns for access, and

the role for electricity in agricultural processing.lxxi

Specifically, as noted above, the timerequired for various agro-processing activities is drastically reduced using hydropower.Some community members argue that the electricity should be reserved for agro-processing exclusively, postponing rural electrification for households.


In 2009, the Government of Nepal passed a wave of new subsidies for renewable ruralenergy technologies. Micro-hydropower falls under this new program, and the subsidydepends on the number of households that will be served by a given project. Table 6displays the subsidy program for micro hydropower.

Table 6: Micro Hydro Subsidy Program (2009 )

Micro hydropower ProjectSubsidy amount per

household ($)*Subsidy ceiling ($/kW

generated)*

New micro project(up to 5 kW)

137.50 1,117

New micro project(5 kW-500 kW)

172 1,432

Rehabilitation of microproject

(more than 5 kW)

50 percent of theinstallation cost

716

Project to be installed forinstitutional and community

use

1,117 (for plants up to 5kW capacity)

344

Project with a business planfor productive use of energy

115 per kWNot exceeding 2,864 per

project

Source: CPEIR, 2011.*Dollar amounts converted from Nepal Rupees (1 NR=0.01 USD)

Despite government subsidies for communities constructing micro hydro projects, theycover less than 40 percent of the total project cost, and the remainder is borne bydevelopers.lxxii However, most Nepalese live on less than $1 a day, and average annualincome is less than $200.lxxiii If an average micro-hydropower project costs between $1,279and $1,779 per kW of output, and does not exceed 100 kW, we can assume a high-end cost


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between $127,900 and $177,900. Assuming the community pays twenty percent of totalproject cost, this requires between $25,580 and $35,580 per project constructed. TheMicro-hydro Village Electrification (MHVE) project carried out by the World Bank and theGovernment of Nepal, among others, “distributed more than 250 [micro-hydro] units to50,000 households.lxxiv Based on this information, one household would be responsible for

providing between $128 and $178 to support the initiative. As mentioned above, thisamount exceeds the total annual income for most families. Similarly, the heavily subsidizedREDP cost beneficiaries around US$85 per person, still representing a significantinvestment for a poor Nepali family.lxxv

However, between 1996 and 2006 the MHVE and REDP initiatives noted significantimprovements in technology leading to lower costs for installment. In ten years, “hardwarecosts declined 33 percent, and capacity development costs declined 84 percent,”demonstrating that as these technologies become more proven and widespread, the cost ofinstallment will serve as less of a barrier to implementation. Figure 5 depicts the change ininstallation cost and cumulative capacity of MHVE and REDP units over a thirteen-year

period.

Figure 5: Installation cost and cumulative capacity of MHVE/REDP micro-hydro units

Source: Sovacool, 2011.


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Although the installation costs of MHPs have fallen in the past 20 years, finding a viablesource of funding is still an obstacle. The most likely option is to pursuing such as the GoN,ADB and World Bank, and the UNDP.

Equity

This analysis of MHPs found significant benefits for vertical equity, or distributing benefitsto the most vulnerable members of society. In the case of Nepal, vulnerable members ofsociety include the general rural population, more specifically women and children.Increased access to electricity in rural households increases consumption expenditures by6 percent and non-farm income by 11 percent. Additionally, there are positive socialoutcomes associated with rural electrification, including girls’ completed schooling years,lower incidence of respiratory problems for women and children, and overall women’sfertility and empowerment indicators.lxxvi

However, in terms of horizontal equity, this option does not contribute to any short-term

benefits for urban Nepalese, some 6 percent of whom still lack access to electricity. Micro-hydropower projects are located in far-reaching rural communities, and rarely include agrid connectivity aspect, although a growing number will likely be part of a mini-grid in thefuture as that technology becomes more prevalent. The overall contribution todevelopment still ranks favorably, as the majority of Nepalese live in rural areas that wouldeventually be served by these projects. Raising rural incomes and fostering businesscreation in rural Nepal for 86 percent of the population will have long-term positiveimplications for the overall development.


Evidence from communities that have implemented MHPs indicates these projects havepositive environmental and health impacts. In particular, the environmental benefitsinclude a decrease in kerosene use and reduced firewood consumption. As a result, therehas been a corresponding increase in “greenery” in communities, and prevention of some517 tons of carbon dioxide emissions per year.lxxvii

As noted above, there was a marked decrease in incidence of respiratory problems forwomen and children in micro-hydro households versus women and children in householdswithout connectivity.


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Evaluation Summary of Alternative II: Micro-hydropower

Evaluation of Alternative III : Mid-range projects between 1 and 100 MW

Cost-Effectiveness

Cost-effectiveness for this alternative was calculated by averaging the available cost per kWdata for small-and-medium-scale hydroelectric projects in Nepal. Appendix 3 displays a listof projects and their average cost per kW. These costs have been indexed to 2013 prices.

To determine a range for the cost of small and medium scale projects, this analysis foundaverage cost per kW data for 13 medium-scale projects and 17 small-scale projects inNepal. These data (see Appendix 3) were obtained from the World Bank, ADB, and NEAreports. Then a weighted average cost per kW was determined for both the small andmedium-scale projects, with the cost per kW of larger projects counting proportionallytoward the average cost. These two weighted average costs make up the range for thisoption.

Benefits $1,279 to $1,779 per kW of installed capacity Increase local incomes by an average of 8 percent

Around 40 new businesses created per district following MHP installation Avoids costly extension of the national grid Addresses disparity between rural and urban electrification Precedent established through REDP, RERL, MHVE programs Government commitment to rural electrification No incidence of protest or sabotage from insurgents Government subsidy program and bank funders Decreased incidence of respiratory problems for women and children Lower reliance on fossil fuels and biomass

o Households with MH access emit about 3.6 kilograms of carbon dioxide lessthan their counterparts

o

Greater energy independenceo Reduce deforestation

Challenges Low interest from foreign funders (i.e. China and India) Technical challenges related to design and project sites, maintenance and

manufacturing Economic efficiency losses from low plant load factors (meaning that electricity is not

constant) Institutional challenges and aid dependency Community disagreement about electricity equity and usage Unclear environmental standards for ro ect develo ment


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For the 13 medium-scale projects, ranging from 12 to 70 MW, the weighted average costper kW installed was determined to be US$3,635. The 17 small-scale projects, withinstalled capacity between 0.1 and 10 MW, had a weighted average cost per kW ofUS$2,450. Therefore, the range for this option is quite wide, with weighted average costs

between $2,450 and $3,635.

From this weighted average cost calculation, a range of the cost to increase Nepal’sinstalled capacity by 300 MW was calculated using the same formula as the MH option. Thecost range to increase capacity by 300 MW for the mid-range option was found to bebetween $735 million and $1.1 billion.6 For small and medium projects, the wide range ofaverage costs is indicative of the broad scope of this option, encompassing plants withcapacity between 1 and 100 MW.

The World Bank calculated EIRRs for small hydropower projects constructed during thePower Development Project (PDP). This included four plants between 2.2 and 5 MW

installed capacity. Each of these projects had EIRRs of around 30 percent.lxxviii The EIRRfor two medium-scale projects in the PDP were estimated at 12 and 13.4 percent.7 TheBank analysis recommended minimizing construction costs and improving plant efficiencyto make these projects more viable. Overall, EIRRs for small (


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supplied money to build a project clinic and school. The clinic offers services thatgovernment funded health posts “are unable to offer,” and treats “between 50 and 70patients” every day.lxxxii Several of Nepal’s medium-scale projects have included school orhealth facilities to provide local communities with an incentive to comply withdevelopment.

Job creation is often cited as a local benefit to communities where dams are constructed.However, in the case of the Khimti project, most laborers were brought in from abroad,with only a few low-level staff hired locally. The same analysis found that about 0.1percent of the total revenue was distributed as income in Nepal, amounting to aroundUS$115,000 (Shrestha, 2008).lxxxiii Government funding could address local employmentconcerns, but government expenditures on hydropower development remain low, neverhaving exceeded 1.1 percent of GDP.

Feasibility


In terms of political feasibility, this option ranks fair, with greater past precedent thanlarge-scale hydropower, but incorporates a comparatively longer regulatory processcompared to that of micro-hydro projects. The Khimti I, Nepal’s first medium-scale fullyprivate sector project, established much of the existing framework of agreements. Thegovernment now provides: partial guarantees; fiscal incentives such as tax holidays; agreater degree of acceptance of foreign ownership; and fixed royalty payments.lxxxiv Additionally, in the 2002 Water Resources Strategy, the GoN emphasized developing smalland medium projects to address domestic needs, with a longer-term goal of developinglarge projects for export.

Despite establishing a regulatory framework to facilitate private investment in the energysector, the licensing process to pursue hydropower projects in Nepal remains confusingand is fraught with delays. In the case of the Nepal PDP, the World Bank restructured theproject in 2008 to allocate more funds toward pragmatic and small-scale development.The report cited “delays in project implementation” due to the political environment as theprimary reason for restructuring.lxxxv

Community Attitudes

Community response to mid-size hydroelectric projects in Nepal has been mixed. The

acceptability of these projects is often dependent upon whether the host communityreceives any benefits. In the Khimti I case, the project school and clinic have improved thestandards of living for households in several districts.

Contrary to micro-hydro projects, small- and-medium scale projects often altercommunities and force relocation. This option is rated moderately in terms of communityattitudes, as general attitudes are less favorable than for MHPs, but more favorable than


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large-scale dam construction. Violent protests and community activism are common inNepal in response to large project proposals.


There are many funding sources available for small and medium projects in Nepal. Khimit Iwas the first fully private sector project, operating under a regulatory frameworkestablished in 1992. Under this framework, private developers have a concessions periodof up to 50 years, after which they transfer partial or whole ownership to the NEA.lxxxvi Developers must follow the agreed upon Power Purchase Agreement (PPA) rate, which is5.52 U.S. cents per unit in the wet season and 9.65 U.S. cents per unit in the dry season, forprojects up to 25 MW.lxxxvii However, for projects larger than 25 MW, rates are negotiatedwith the GoN. Provided that Nepal’s government gains stability in the coming years,private financing will likely increase and small- and-medium projects will become moreviable without relying on public funding.

Independent power producers (IPPs) and international developers provide funding formany small- and medium-sized hydropower projects. The Clean Energy DevelopmentBank in Nepal has established a US$ 3 million development fund to conduct feasibilitystudies for small- and medium-sized projects, as these projects often suffer from an early-stage financing gap.lxxxviii Recently, the GoN has allowed 100 percent foreign directinvestment in hydropower, which will likely induce greater interest in investment, butdevelopers still must work with the NEA to distribute electricity. In the long-term, the GoNhas expressed interest in privatizing and unbundling the NEA to facilitate IPP-developedprojects and allocate more responsibility to communities.

Equity

The primary equity concern regarding this option is small and medium-scale projects aregrid-connected in Nepal. Larger projects provide electricity to customers in relativelydeveloped areas of Nepal, and do not increase connectivity for the 85 percent of thepopulation living in rural communities. Further, negative health and environmental factorsassociated with dam development often disproportionately impact the immediatesurrounding community. Therefore, this option has relatively poor outcomes in terms ofvertical equity. If small- and-medium-scale projects include a transmission expansion thattargets rural communities, they will better satisfy development needs and equity concernsin Nepal. Environmental assessments should account for the likely impacts of project

development and provide compensation to address any inequities created.

Horizontal equity impacts are generally positive, with the majority of small- and medium-scale projects aimed at increasing the domestic energy supply.



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Williams & Porter (2006) note when comparing the environmental impacts of different sizedams, most experts agree that the larger the project, the greater the negative impact onwildlife, communities, and ecology. The vast majority of the negative impacts ofhydropower projects are those inflicted upon the environment. In the construction anddevelopment process, acquiring building materials and carrying out construction are

associated with greenhouse gas emissions. Additionally, dam construction alters river flowand obstructs fish migration. Therefore, during the planning and proposal process,mitigation measures such as fish ladders and pumps to control sediment displacementmust be considered.

Small- and-medium projects typically use less intrusive construction measures than large-scale dams, such as low diversion weirs.lxxxix A thorough environmental assessment of the60 MW Middle Marsyangdi identified several major issues with this type of damconstruction, including: change in hydrology as a result of tunneling and excavation;drainage changes; soil erosion; sedimentation; land instability; loss of fish diversity; loss ofterrestrial vegetation; and increased noise pollution during construction and operation.xc

The Middle Marsyangdi also resulted in negative impacts on the health and sanitation ofthe community from the increased exposure to an outside workforce. Additional healthoutcomes included the degradation of air quality, water quality, and solid waste.xci Despitethese negative health and environmental outcomes, there are positive health impactsinherent in replacing traditional fuels with hydroelectricity. Indoor air pollution in Nepalfar exceeds optimal levels, resulting in around 7,500 premature deaths annually.xcii Greateraccess to hydroelectricity provided by constructing small-and-medium-scale dams wouldcombat the negative health and environmental outcomes associated with burning fuels forenergy.

Evaluation Summary of Alternative III: Mid-range (small and medium) dams

Benefits Moderate cost per kW to install small schemes ($2,450/kW) Community benefits (clinics, schools) developed along with some

projects Public and private funding sources available

Challenges High costs per kW for medium-scale projects ($3,635/kW) Political climate restricts financing from foreign investors and

developers Few local jobs created if foreign-developed Distribution of electricity to on-grid users or for export sale Environmental and health impacts harm local communities Unclear environmental standards for project development


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Evaluation of Alternative IV: Pursue large-scale hydroelectric projects

Cost-Effectiveness

Nepal has only completed one large-scale hydroelectric project to date. Construction on

the 144 MW Kali Gandaki A began in 1997 and was completed in 2002. Since 2002, it hasoperated as a ROR plant producing around 592 GWh per year.xciii According to datacollected by the Nepal Electricity Authority, the cost per kW of installed capacity for theKali Gandaki A is USD$3,613.8 As calculated in the other sections, the cost to increaseNepal’s total installed capacity by 300 MW under this scenario would be around $1.1billion.

The EIRR, as calculated in the ADB project review document of the Kali Gandaki, wasestimated at 18.2 percent, compared with the projected EIRR of 15 percent.

Nepal’s only large-scale dam ranks poorly with higher costs than both mid-range projects

and micro-hydropower units. However, the 456 MW Upper Tamakoshi, a ROR plant that isunder construction in Nepal, has a projected cost per kW of only US$1,000.xciv The UpperTamakoshi has a low projected cost due to the great natural damming potential of theconstruction site. However, delays in construction, increasing machinery costs, and otherunknown factors may cause the final cost to be higher than projected.xcv Large-scaleprojects require extremely high initial investments with a long return period, and thereforeit is not the most optimal choice for addressing Nepal’s energy crisis in the short-term.Furthermore, as discussed in the following section, much of the motivation behinddeveloping large-scale projects is to generate electricity for export rather than domesticconsumption. Increasing large-scale potential is not motivated by domestic connectivityconcerns, and therefore does not address the problem at hand, namely, Nepal’s insufficient

electricity supply.

Discussion of further costs and benefits

One project with great potential is the jointly proposed 6,720 MW Pancheswor mega-dam,between India and Nepal. However, in the 16 years since India and Nepal agreed topursue this joint venture, there has been no substantial progress in developing thisproject.xcvi Progress has stalled in this negotiation due to lingering mistrust between Nepaland India, as well as Nepal’s political instability. On paper, the two countries have a historyof cooperation in the energy sector, with five signed treaties fostering cooperation andmanagement of common resources. However, many in Nepal view these treaties as

unequal, with India receiving a disproportionate share of benefits in thesearrangements.xcvii

Equality concerns linger, as some critics of large-scale dams contend that Nepal will receivepoor returns from foreign-developed projects. In the case of the proposed 750 MW West

8 Cost adjusted to 2013 price levels.


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Seti, the project would generate around 3,636 GWh of energy annually. The ADB projectanalysis indicates that by exporting this energy to India, the direct economic benefits to theGoN will amount to US$33 million annually, totaling $991 million over the 30-year licenseperiod (ADB, 2007).xcviii Critics of the project note the majority of export earnings will bespent on dam operation and maintenance, taxes and royalties to the government, and loan

repayment. Provided India and Nepal are able to mitigate bilateral mistrust, the potentialfor cross-border energy exchange is great, and India is the likely funder of and destinationfor the majority of Nepal’s eventual electricity exports.

As noted in the analysis of the mid-range alternative, foreign laborers often fill jobs createdby foreign directed projects. Therefore, as many of Nepal’s large-scale dams would rely onforeign direct investment, any benefits to local salaries or employment prospects areunclear.

One clear benefit of developing large hydropower projects is the potential for exportrevenue to bolster Nepal’s struggling economy. In the case of Bhutan, the government-

directed development of the hydropower sector has turned hydropower into one of themain drivers of economic growth. With an overall potential of around 30,000 MW, Bhutanhas developed only 1488 MW (around 5 percent), and in 2009 this made up almost 19percent of GDP.xcix Overall, hydropower made up around 39 percent of Bhutan’s exports in2009, with a goal of 80 percent by 2021. Nepal has similarly high potential to turn into adriver of domestic economic growth, and should look to Bhutan as an example of successfulhydroelectric development.

Feasibility


The biggest proponent of large-scale dams is the GoN. Large dams would take advantage ofNepal’s rich water resources and capitalize on the nation’s “liquid gold”. Although thegovernment is eager to build large-scale schemes, it faces opposition from Nepal’s “activecivil society keener on small-scale hydropower”.c The GoN views large dams as a source ofexport revenue that could bolster Nepal’s struggling economy and promote nationalgrowth and development.

Despite government interest in developing large-scale hydroelectric projects, politicalinstability and local resistance have served as major obstacles to dam construction. The

Snowy Mountain Engineering Group (SMEC), an Australian company, completed afeasibility study for the Kali Gandaki A in July 1979, but the project did not begin until 1997and was completed in 2002.

In 1995,

developing nepals hydroelectric resources - policy alternatives

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